How *Not* To Do Economic Development

Posted by Alan Mallach on September 29, 2016

Camden is one of the most distressed cities in the United States, and if any city needs state help to build its economy, it’s Camden. While, in its way, the state of New Jersey has responded, the way it has done so adds up to one of the most egregious examples of misuse of economic development incentives in recent memory. At the same time, it offers some useful lessons for thinking about urban economic development, especially about a concept that people working in this field don’t think about enough—opportunity costs.

New Jersey has created what it calls the Grow NJ program, a suite of incentives to encourage corporations to move into or stay in the state. It targets certain areas, with the most generous incentives offered for companies to stay in or move to the state’s four poorest major cities: Camden, Trenton, Paterson and Passaic. So far so good.

Since late 2013, the state of New Jersey has given out $1.1 billion in tax incentives under this program to 16 companies in the city of Camden. Five account for $900 million of this total, as shown in the table. All are major, well-heeled corporations. With the exception of EMR, which is a scrap metal facility already located in Camden, all of them were already operating in nearby suburbs. They are being paid on average nearly $400,000 per job to move their operations five or ten miles into new buildings in the city of Camden, along with creating a few additional jobs once they relocate.

What’s wrong with this picture?

Since almost all the actual jobs are being moved from nearby suburban locations, one can reasonably assume that the existing workers will simply shift their commute to Camden from Cherry Hill or Moorestown. The likelihood of future jobs is uncertain, and in any event, most aren’t likely to go to Camden residents. Currently, 7 out of 8 jobs in the city of Camden are held by commuters, and as far as I’ve been able to tell from the documents available, none of these companies have to hire Camden residents for any additional jobs they’ve promised to create.

The EMR scrap metal facility is a special case. They employ 201 people in Camden at present, but available data suggests that only 40 or 50 of those people are Camden residents. Moreover, this facility, which is located close to a low-income residential neighborhood, has been a source of residents’ complaints about pollution-related health problems for decades, to little avail.

Subaru’s new office building, which is being built as part of a new secure office park adjacent to the Campbell Corporation headquarters, was described by a Philadelphia Inquirer writer as, “a lonely island in an asphalt sea containing 1,031 parking spaces.” On top of this, Subaru and the other beneficiaries of NJ’s largesse will pay no property taxes on the building for 10 years, and only pay full taxes after 20 years. On a $118 million-dollar building, Subaru will pay taxes only on the land, or about $100,000 a year for the first 10 years, compared to over $500,000 on the building they’re leaving behind in suburban Cherry Hill. The Holtec facility, rather grandly named the Holtec Technology Campus, is equally isolated, on the site of a former shipbuilding facility along the Delaware River in the shadow of the Walt Whitman Bridge.

It doesn’t do much for Camden. It’ll get a few shiny new buildings, but they won’t be employing many Camden residents—hence the large parking lots—and won’t be paying much in property taxes for the foreseeable future. People who work in isolated buildings like the Subaru and Holtec facilities are likely to drive in in the morning, and drive out in the evening. The chance of much in spin-offs, even a sports bar or deli, is remote. Frankly, it looks to me like the state of New Jersey is more interested in looking concerned about the revitalization of Camden than it really is.

But there’s a more important issue here. That’s the question of opportunity costs. Let’s try a thought experiment. Assume that New Jersey (or any state) were willing to commit $90 million a year in state revenues for ten years, as these incentives demand. Assume again that these funds could be used to support any economic development activity. They could be used for job training, could help rebuild infrastructure, provide direct grants, and/or used to leverage private capital investment; or, assuming the state were willing to extend the commitment beyond 10 years, capitalized to create an investment fund of $1.5 to $2 billion. Under those circumstances, what benefits could be created for the city of Camden and its residents? It’s pretty safe to say that the same level of state funds could yield vastly greater benefits than these incentives will.

It’s equally safe to say that NJ’s economic development planners didn’t spend much time thinking about opportunity costs, or if they did, their ideas got little traction with whomever made the decisions. But, it’s a broader issue. As a field, we don’t do much evaluation of alternatives or weigh the opportunity costs of our decisions. Yet every choice we make has opportunity costs. Every day, the decisions we make—which neighborhood to target, which house to rehab, whether to use funds for houses or job training, whether to help elderly homeowners or struggling landlords, etc., etc.—inevitably forecloses something else that could have been done instead. True, local practitioners may not always have choices because of the requirements of state or federal programs, but we owe it to our communities to be constantly thinking about this question, and constantly challenging ourselves to think about alternatives, rather than continue down familiar tracks.

For further information:

Inga Saffron, “Changing Skyline: It’s what makes Subaru a tax dodge” Philadelphia Inquirer, August 29, 2015

Nurin, Tara. “The List: Camden Banks On Millions in Tax Subsidies to Help Fund Its Future” NJ Spotlight, October 6, 2015

Photo credit: Rendering of Subaru's office building in Camden. By Granum A/I.

About the author more »

Alan Mallach, senior fellow at the Center for Community Progress, is the author of many works on housing and planning, including Bringing Buildings Back, A Decent Home, and Inclusionary Housing in International Perspective. He has served as director of housing and economic development for Trenton, N.J. from 1990 to 1999, and teaches in the City and Regional Planning program at Pratt Institute. He is also a fellow at the National Housing Institute.

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